CHAPTER Corporations: Organization,

11 Share Transactions,
Dividends, and Retained
Earnings
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Identify the major characteristics of a corporation.
2. Record the issuance of ordinary shares.
3. Explain the accounting for treasury shares.
4. Differentiate preference shares from ordinary shares.
5. Prepare the entries for cash dividends and share dividends.
6. Identify the items reported in a retained earnings statement.
7. Prepare and analyze a comprehensive equity section.
11-1
 The Corporate Form of Organization
Learning Objective
5
Pembagian dari kas atau saham Prepare the entries for
cash dividends and share
kepada pemegang saham berdasarkan dividends.
basis pro rata atau proposional basis
Tipe dari deviden

1. Cash 3. Shares
2. Property

Dividends dibagikan berdasarkan: (1) persentase dari nilai pari

atau state value (2) sebagai jumlah dolar per saham

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 Cash Dividends

Terdapat tiga tanggal penting pada deviden Illustration 11-12

Key dividend dates

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 Cash Dividends

For a corporation to pay a cash dividend, it must have:

1. Retained earnings - Payment of cash dividends from

retained earnings is legal in all jurisdictions.

2. Adequate cash  memiliki uang untuk membayar

deviden

3. A declaration of dividends by the Board of Directors.

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 ENTRIES FOR CASH DIVIDENDS
Illustration: On Dec. 1, Direksi Media General mengumumkan deviden tahun
tersebut €0.50 per lembar saham. Tahun tersebut memiliki total deviden yg akan
dibagikan dari 100,000 lembar saham biasa dengan nilai pari €10. Deviden akan
dibayarkan tanggal 20 Januari kepada pemegang saham dan akan dibuat daftar
pemegegang saham pada tanggal 22 Desember

December 1 (Declaration Date)

RE 50,000 (100.000 x € 0,5)
Dividends Payable 50,000

December 22 (Date of Record) No entry

January 20 (Payment Date)

Dividends Payable 50,000
Cash 50,000
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 Cash Dividends

ALLOCATING CASH DIVIDENDS BETWEEN

PREFERENCE AND ORDINARY SHARES

Deviden pemegang saham istimewa harus dibayarkan

terlebih dahulu dari pada deviden pemegang saham biasa

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 Cash Dividends

Illustration: On December 31, 2017, IBR Inc. memiliki 1,000

lembar saham dan deviden akan dibagikan 8% dr lembar saham,
dengan nilai par value €100 dan sebagai saham preferen
kumulatif. Dan memiliki 50,000 lembar saham biasa yg beredar
dengan nilai pari €10. At December 31, 2017, the directors
declare a €6,000 cash dividend. Prepare the entry to record the
declaration of the dividend.

Cash Dividends 8,000

Dividends Payable 8,000
Preference Dividends: 1,000 shares x €100 par x 8% = €8,000

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 Cash Dividends

Illustration: At December 31, 2018, IBR declares a €50,000

cash dividend. The allocation of the dividend to the two classes
of shares is as follows:

Illustration 11-13
Allocating dividends to preference and ordinary shares

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 Cash Dividends

Illustration: At December 31, 2018, IBR declares a €50,000

cash dividend. Prepare the entry to record the declaration of the
dividend.

Cash Dividends 50,000

Dividends Payable 50,000

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 Share Dividends

Pro rata distribution of the corporation’s own shares.

Illustration 11-14
Effect of stock split
for shareholders

Results in decrease in retained earnings and

increase share capital and share premium.
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 Share Dividends

Reasons why corporations issue share dividends:

1. Perusahaan tidak memiliki cukup kas untuk

membayar deviden

2. Memperbanyak saham yang beredar dipasar

3. Memiliki modal yang diinvestasikan kembali dalam

bentuk saham

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 Share Dividends

 Small share dividend (kepemilikan saham kurang dari

20–25% saham yang diterbitkan, dinilai berdasarkan
fair market value) *
 Large share dividend (lebih dari 20–25% saham yang
diterbitkan, dinilai berdasarkan par value)

* Accounting based on the assumption that a small share dividend

will have little effect on the market price of the outstanding shares.

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 Share Dividends
Illustration: Danshui Ltd. Memiliki saldo retained earning
$3,000,000. Danshui mendeklarasikan bahwa deviden akan
dibagikan 10% dari 50,000 lembar saham dengan fair value saham
biasa $100 untuk investor yg memiliki <25% kepemilikan saham.
Fair market value pada saat ini $150 per lembar saham.
10% share dividend is declared (ketika mendeklerasikan)
Share Dividends (50,000 x 10% x NT$150) 750,000
Ordinary Share Dividends Distributable 500,000
Share Premium—Ordinary 250,000

Shares issued (ketika menerbitkan)

Ordinary Share Dividends Distributable 500,000
Share Capital—Ordinary (50,000 x 10% x NT$100) 500,000

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 Share Dividends

Statement Presentation

Illustration 11-15
Statement presentation of ordinary shares dividends distributable

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 Share Dividends

EFFECTS OF SHARE DIVIDENDS

Illustration 11-16
Share dividend effects

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 Share Dividends

Question
Which of the following statements about small share
dividends is true?
a. A debit to Retained Earnings for the par value of the
shares issued should be made.
b. A small share dividend decreases total equity.
c. Market price per share should be assigned to the
dividend shares.
d. A small share dividend ordinarily will have an effect
on par value per share.
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 Share Splits

 Reduces the market value of shares.

 No entry recorded for a share split.
 Decrease par value and increase number of shares.

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 Share Splits

Illustration: Assume Danshui Ltd. splits its 50,000 ordinary

shares on a 2-for-1 basis.

Illustration 11-17
Share split effects
Results in a reduction of the par or stated value
per share.

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 Investor Insight
A No-Split Philosophy
Warren Buffett’s company, Berkshire Hathaway (USA), has two classes
of shares. Until recently, the company had never split either class of
shares. As a result, the class A shares had a market price of $97,000 and
the class B sold for about $3,200 per share. Because the price per share
is so high, the shares do not trade as frequently as the shares of other
companies. Mr. Buffett has always opposed share splits because he feels
that a lower share price attracts short-term investors. He appears to be
correct. For example, while more than 6 million shares of IBM (USA) are
exchanged on the average day, only about 1,000 class A shares of
Berkshire are traded. Despite Mr. Buffett’s aversion to splits, in order to
accomplish a recent acquisition, Berkshire decided to split its class B
shares 50 to 1.
Source: Scott Patterson, “Berkshire Nears Smaller Baby B’s,” Wall Street Journal
Online (January 19, 2010).

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 > DO IT!
The market price of Sing CD Company’s 500,000 shares of £2 par value
ordinary shares is £45. President Joan Elbert is considering either a 10%
share dividend or a 2-for-1 share split. She asks you to show the before-
and-after effects of each option on retained earnings, total equity, total
shares outstanding, and par value per share.

Share dividend amount is £2,250,000 [(500,000 × 10%) × £45].

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 Retained Earnings
Learning Objective
 Net income increases Retained 6
Identify the items
Earnings and a net loss decreases reported in a retained
earnings statement.
Retained Earnings.

 Part of the shareholders’ claim on the total assets of the

corporation.

 Debit balance in Retained Earnings is identified as a

deficit.

Illustration 11-20
Equity with deficit

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 Retained Earnings Restrictions

Restrictions can result from:

1. Legal restrictions.
2. Contractual restrictions.
3. Voluntary restrictions.

Companies generally disclose retained earnings restrictions in

the notes to the financial statements.

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 Prior Period Adjustments

 Correction of an error in previously issued financial

statements.
 Result from:
► mathematical mistakes.
► mistakes in application of accounting principles.
► oversight or misuse of facts.
 Adjustment made to the beginning balance of retained
earnings.

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 > DO IT!
Chen Ltd. has retained earnings of ¥5,130,000 on January 1, 2017.
During the year, Chen earned ¥2,000,000 of net income. It declared
and paid a ¥250,000 cash dividend. In 2017, Chen recorded an
adjustment of ¥180,000 due to the understatement (from a
mathematical error) of 2016 depreciation expense. Prepare a
corrected retained earnings statement for 2017.
Chen Ltd.
Retained Earnings Statement
For the Year Ended December 31, 2017

Balance, January 1 ¥5,130,000

Add: Net income 2,000,000
Less: Dividends 250,000
Balance, December 31 ¥6,880,000

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 > DO IT!
In 2017, Chen recorded an adjustment of ¥180,000 due to the
understatement (from a mathematical error) of 2016 depreciation
expense. Prepare a retained earnings statement for 2017.

Chen Ltd.
Retained Earnings Statement
For the Year Ended December 31, 2017

Balance, January 1 ¥5,130,000

Correction for overstatemet of net income in
prior period (depreciation error) -180,000
Balance, January 1, as adjusted 4,950,000
Add: Net income 2,000,000
Less: Dividends 250,000
Balance, December 31 ¥6,700,000

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 Retained Earnings Statement

Debits and Credits to Retained Earnings

Illustration 11-23
Debits and credits to retained earnings

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 Retained Earnings Statement

Question
All but one of the following is reported in a retained earnings
statement. The exception is:
a. cash and share dividends.
b. net income and net loss.
c. sales revenue.
d. prior period adjustments.

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 Statement Presentation and Analysis
Learning Objective 7
Prepare and analyze a
Presentation comprehensive equity
section.

Illustration 11-25 LO 7
11-28 Comprehensive equity section
 Statement Presentation and Analysis

Analysis
Carrefour’s beginning-of-the-year and end-of-the-year ordinary
shareholders’ equity were €8,047 and €8,597 million,
respectively. Its net income was €1,263 million, and no
preference shares were outstanding. The return on ordinary
shareholders’ equity is computed as follows.

Illustration 11-27
Return on ordinary shareholders’ equity and computation

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 > DO IT!
On January 1, 2017, Busan Ltd. purchased 2,000,000 treasury shares.
Other information regarding Busan is provided. (All amounts in thousands.)

2016 2017
Net income ₩110,000 ₩110,000
Dividends on preference shares ₩10,000 ₩10,000
Dividends on ordinary shares ₩2,000 ₩1,600
Ordinary shareholders’ equity, beginning of year ₩500,000 ₩400,000*
Ordinary shareholders’ equity, end of year ₩500,000 ₩400,000
*Adjusted for purchase of treasury shares.

Compute return on ordinary shareholders’ equity for each year.

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 APPENDIX 11A Statement of Changes in Equity
Learning Objective 8
Describe the use and content of
Illustration 11A-1
the statement of changes in
Statement of changes in equity
equity.

When a statement of changes in equity is presented, a retained

earnings statement is not necessary.

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 Book Value—Another per Share
APPENDIX 11B
Amount
Learning Objective 9
Compute book value per
Book Value per Share share.

The equity an ordinary shareholder has in the net assets of the

corporation.

Illustration 11B-1
Book value per share formula

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 Book Value per Share

The computation of book value per share involves the following

steps.
1. Compute the preference share equity. This equity is equal
to the sum of the call price of preference shares plus any
cumulative dividends in arrears. If the preference shares do
not have a call price, the par value of the shares is used.

2. Determine the ordinary shareholders’ equity. Subtract the

preference share equity from total equity.

3. Determine book value per share. Divide ordinary

shareholders’ equity by ordinary shares.

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 Book Value per Share

EXAMPLE
Illustration: Using the equity section of Graber SA shown in
Illustration 11-25. Graber’s preference shares are callable at €120
per share and are cumulative. Assume that dividends on Graber’s
preference shares were in arrears for one year, €54,000 (6,000 x
€9). The computation of preference share equity (Step 1 in the
preceding list) is:

Illustration 11B-2
Computation of preference share equity—Step 1

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 Book Value per Share
Illustration 11B-2

Computation of book value:

Illustration 11B-3
Computation of book value per share with preference shares— Steps 2 and 3
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 Book Value versus Market Value

The correlation between book value and the annual range of a

company’s market value per share is often remote.

Illustration 11B-4
Book value and market price compared

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TUGAS GCR

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TUGAS GCR

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